what are mutual funds and how do they work?

Answer 1

In simplest terms, mutual funds are just groups of investments. They can be stocks, or bonds, or a combination of the two. They can even be investments in real estate (REITs).

In an active mutual fund, a fund manager decides what to purchase for the fund. In a stock fund, the manager picks the stocks to buy in hopes that the stocks will go up. In bond fund, he picks bonds. In some funds, the manager has the option of choosing between both stock and bonds. He may even decide buy nothing if he can't find anything worth buying, keeping cash on hand until he finds something worthwhile to buy.

In an index fund, a fund manager's main job is just to buy the stocks or bonds in an index. For example, in an S&P 500 stock fund, the manager's job is to buy all the stocks in S&P 500 and hold them.

Answer 2

A mutual fund is an account where many investors pool their money and buy a large number of stocks and/or bonds. When you put money in, you buy shares in the mutual fund that represent your portion of the fund's total investment. Your shares go up or down in value according to how the underlying stocks/bonds perform. When you want to sell, you get back the then-current value of your shares.

The advantage is that you can diversify, that is, buy many different stocks or bonds, without having to put up the amount of money it would take to buy all of them yourself. You also have a professional managing the fund.

Check out Mutual Funds For Dummies by Eric Tyson for lots of good info in plain language.

Answer 3

Mutual funds are schemes operated by asset management companies

Answer 4

Many people pool their money, and a manager buys stocks or bonds with the pool of money. Each one owns a "share" of the pool.